No. Your friend is right that if you decide to gift her your half of the property then there is a reporting requirement. You - as the gift giver - are required to file a form detailing the gift and its value.
But for the rental property you two were already splitting it 50/50 on two returns and now it will be split 100/0. The IRS is expecting all of the income to be reported. You were never required to put it on 50/50. You could have said "my sister does more work than me" and split it 60/40 or 70/30 or whatever you guys deemed fair. As long as all of the income is reported then the IRS is happy. And in this case it is.
@taxcrazed
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